Media Coverage

February 10, 2017

OTR Global Shuts Down Trading

BY JOE MANTONE

OTR Global LLC has shut down its trading desk and will rely on research to generate revenue.

OTR Global President and CEO Stanton Green said the company disclosed the moves in January, but declined to say how many employees were impacted.Two industry sources familiar with the company said the trading desk consisted of six to 10 people, but they were unsure how many back-office personnel were let go.

OTR's website says the company has more than 140 research personnel. Green said that without the expense of trading, OTR can allocate more resources to content by taking such steps as expanding research coverage and further developing its proprietary data.

"We are better served doing that than trying to invest in trading," he said.

The company's research coverage focuses on technology, media and telecommunications, consumer retail, and cyclical sectors, which includes agriculture, industrials, energy and transportation. Green said he could see OTR expanding coverage within the sectors it currently covers and perhaps starting to cover healthcare.

OTR will look to generate revenue from direct payments and commission sharing agreements, or CSAs. With CSAs, clients execute trades with a broker/dealer but request that part of their trade commission fees go to a separate research firm. Green noted that OTR has established rate card pricing and most clients are agreeing to those levels.

OTR, similar to other research-driven firms, was previously using trade commissions to help generate revenue. With that model, it is less clear whether clients were trading with OTR because they were happy with the order execution or if they were doing business with the desk to compensate the companyfor its research, Green said.

"We felt as though almost 95% to 100% of our dollars was coming in for our content," Green said.

He added that the buy side is increasingly looking to pay for research separately from trading, a practice often referred to as unbundling. European Unionegulations known as MiFID II take effect in 2018 and put in place rules that aim to separate research payments from trade commissions.

"Unbundling and MiFID II are forcing a real separation from research and trading," he said.

The changing dynamics in research payments are only the latest challenge to the equities business. For years, the industry has dealt with expanding compliance and regulation which increases costs for companies. Many players are also facing revenue headwinds from lower trading volumes, declining commissions and passive investment strategies taking share from active managers, a target audience for research analysts and core clients of many trading desks.

The loss of share to passive strategies is leading buy-side players to examine their expenses. As a result, many are reducing the number of their sell-side relationships, said Richard Lipstein, a managing director in the financial services practice for the executive search firm Gilbert Tweed International.

"The buy side is trying to whittle down the list of companies they deal with and figure out how to pay those they want," Lipstein said.Competing for buy-side trades is often more challenging for smaller desks because they do not always have sufficient resources to efficiently execute orders as well as larger firms do. The industry has witnessed a long-term secular shift in which clients have been increasingly using alternative trading systems such as crossing networks and are less reliant on calling brokers to execute orders.

"In most of those situations, it is a point-and-click transaction as opposed to a phone transaction," Green said.

The industry pressure has led to many companies reducing their equities exposure or winding down entirely. In 2016, companies such as BB&T Securities LLC shut down equity research while other research-driven businesses including Sterne Agee CRT, Topeka Capital Markets Inc. and Portales Partners LLC closed completely.

OTR was founded in 1995 as Off The Record Research and has attempted to establish an alternative research platform by gathering market information through interviews with sources. Liquidnet Inc. is a minority owner in OTR.

Green understands the impact of shedding trading, but he believes it is in the company's best interest.

"This decision impacts people and people's lives," Green said. "You're never happy with that. But in terms of the business model going forward, I'm absolutely positive this is the right move for the firm."

This transmission was produced for the exclusive use of OTR Global LLC (OTR), and may not be reproduced or relied upon, in whole or in part, without OTR’s written consent. The information herein is not intended to be a complete analysis of every material fact in respect to any company or industry discussed. OTR Global LLC is an investment advisor subsidiary of OTR Global Holdings LLC. OTR Global Trading LLC is a registered broker dealer subsidiary of OTR Global Holdings LLC. The affiliated companies of the OTA Financial Group LP and/or its principals, employees, clients or researchers may have an interest in the securities of issuers discussed herein or in securities of other issuers in other industries. OTR, OTR Global Primary Intelligence and OTR Field Force are trademarks owned by OTR Global Holdings II Inc.